Anyone interested in residential, if not commercial, real estate over the past couple of years knows the big plays have been in the multifamily sector.

The reasons are fairly obvious. During the boom years, the flood of easy money into single-family homes left the apartment sector on the sidelines. Then came the recession and multifamily was starved for new development capital. The end result was a shortage of new multifamily projects just as the need for rentals began to lift in a big way — not only from folks who lost their homes during the recession but from young people who were finally making enough money to move into their first rental situation.

A couple of data points: According to the Census Bureau, apartment building starts were trending toward 229,000 units this year, a substantial improvement over the 100,000 to 167,000 units built from 2009 to 2011; and the Survey of Market Absorption of Apartments reports second-quarter, three-month, absorption rates for multifamily rentals increased 61 percent after falling to 56 percent during the first quarter of 2012.

For the past three years, capital returned to the multifamily sector, not only for new building, but investment dollars as well. Indeed, institutional investment in the sector has been so rampant that capitalization rates (ratio between net operating income and capital cost) have dropped into the 5 percent to 6 percent range.

This has changed the market for investors.

I recently spoke to executives of two private investment groups specializing in multifamily and each were at the opposite end of the investment-sentiment continuum — one extremely positive, the other much less so. The difference between the two can be attributed to target market for investment and type of product.

I’ll start on the downside first.

Leeor Maciborski, managing partner of ROM Investments Inc., thought he had a pretty good niche: small apartment buildings centered in the Hollywood area of Los Angeles. The company owns 1,000 units and this year bought buildings of 49 and 20 units, but the outlook for new deals looks sketchy at best.

"Our niche was the small- to mid-size apartment complexes," Maciborski said. "We’ll take a good deal at $2 million and we’ll take a good deal at $10 million. We like to get in between the mom-and-pop private investors and institutional players."

However, the institutional investors who have been targeting "A" markets such as Los Angeles have been finding the appetite for apartments so competitive that they have been forced to go into new territory, the smaller property.

"Institutional investors are coming in and bidding on smaller and smaller buildings," Maciborski said. "We never used to see bigger companies with institutional conduit equity coming into a $10 million deal. Now they are and I can’t begin to tell you how competitive the market is now. If you put something for sale through conventional channels like LoopNet or CoStar, you will get 17 offers by the end of the first business day."

Earlier this year, Cresta Properties in Los Angeles bought three Hollywood-area apartment buildings, totaling 60 units, for $6.8 million. Cresta currently owns more than 700 units in downtown Los Angeles, Hollywood and West Hollywood.

Maciborski tells me his firm recently bid 96 percent of list price on a $5.5 million, 38-unit property and expected to close, then someone else swooped in paying 110 percent of list and closed instead.

On the other coast, Miami-based Advenir, which was founded in 1996, has owned more than 10,000 apartment units valued at about $1 billion.

Todd Linden, Advenir’s chief acquisition officer, tells me his company has so far managed to avoid institutional fracases.

"There’s a clear window for our space, which is B to A- properties that need renovation," he said. "Institutional investors are focusing more on the core MSAs (metropolitan statistical areas) and urban infill locations, which are trading at 5.5 percent and below cap rates. We’re looking for assets that are at 6.5 percent and above."

Advenir seeks value-add properties, which have a higher risk factor and puts the company in a niche different place from institutional players.

"In very few cases, we see the institutional push," Linden said. "In fact, in many cases we’re buying from REITs that are liquidating in what I would call more suburban locations."

Advenir focuses on three states — Florida, Texas and Colorado — and over the last 14 months closed on 2,600 units in those three markets.

A good example of an Advenir deal was the recently completed purchase of a 308-unit property in Orlando, which is not considered an A market by institutional investors. They made the purchase at a 6.6 percent cap rate from the big apartment REIT, Equity Residential of Chicago.

Both Advenir and ROM like the value-add sector because of the potential to increase rents.

"Equity Residential had upgraded about 10 percent of the units and (is) achieving $75 more in rent growth," Linden said. "We are going to maintain that same program as well as upgrade the common areas. This was an early 1990s-era product and we liked the value-add potential."

Occupancy across Advenir’s portfolio stands about 95 percent.

On the West Coast, Maciborski reported, "Vacancies in our submarket, Hollywood, is 2 percent. Across our portfolio it’s 1 percent. That’s a bad sign for us because we aren’t raising rents fast enough."

Interestingly, Maciborski is shifting toward the Advenir strategy. "We are looking at product with problems, something we can do as a value-add," he said.

If there is one cloud on the horizon, it might be that apartment performance might have peaked. The Wall Street Journal in October reported that the sector, while still robust, might be losing steam. Quoting an REIS study, the WSJ noted that rents on a national level increased 0.8 percent in the third quarter to $1,090 a month, which was slower than the 1.1 percent increase in the second quarter.

What’s an apartment investor to do?

Maciborski suggests buying "selectively," which is not much different from Linden’s advice, which is to do better due diligence.

As Linden points out, "In Orlando, for example, you can be in a submarket that is very strong, but go two miles to the west or east and you can be in an area of town that you really don’t want to invest in."

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